Microsoft (MSFT) Buying Yahoo, Could This Take YHOO Stock to New Highs?

By Alessandro Bruno, BA, MA Published : March 29, 2016

Could Microsoft Takeover Yahoo! Stock?

Yahoo! Inc. (NASDAQ:YHOO), the first Internet star, which was launched in 1995 by David Filo and Jerry Yang, may be heading toward a merger with Microsoft Corporation (NASDAQ:MSFT). Microsoft has begun discussions with various investment funds to contribute to the acquisition and Yahoo stock gained almost half a percentage point on the news.

But the talks are still in their infancy, and Yahoo stock’s small percentage point gain will grow as the rumors materialize. Microsoft, in fact, has refused to comment. This suggests the talks are reaching the interesting bits. (Source: “Is Microsoft in the Yahoo bidding hunt?” USA Today, March 28, 2016.)

Yahoo wants to divest its Internet activities, including the search engine, e-mail, and news sites. That’s no secret. Yahoo’s besieged CEO, Marissa Mayer, reiterated the company’s plan to sell off its pieces just weeks ago.

In recent years, Yahoo has lost ground to its competitors, including Google and Facebook, in the battle for online ads. Until very recently, Verizon appeared as the likeliest bidder for Yahoo’s main assets. Last December, the telecom giant expressed interest in grabbing Yahoo, and yet Microsoft has a historical “precedent.” Indeed, Verizon is a likely contributor to the Microsoft bid. (Source: “Microsoft Corp in talks with possible Yahoo Inc buyers about backing their bids, source says,” The Financial Post, March 28, 2016.)

In 2008, the company that reinvented the meaning of “Windows” tried to buy Yahoo for $45.0 billion in a hostile bid. Yahoo management rejected the offer as too low. Microsoft can be much less generous with its offer today.

Windows Microsoft officials are said to be discussing with private equity funds about participating in a bid for Yahoo—all of it, not just the bits and pieces that were up for grabs. Microsoft already has a relationship with Yahoo, having signed research agreements and advertising years ago. Microsoft should find some use for Yahoo’s pieces to expand its own brand. Meanwhile, the millions of “Yahoo! Mail” users will be reluctant to change services, so that aspect offers a strong market point. Yahoo has reached the end of an era and a year from now, it will look much different than it does now.

Meanwhile, investors and shareholders are urging Yahoo to sell its core business rather than split juicy stakes in Yahoo! Japan and Alibaba Group Holding. Yahoo did actually put its core activities on the auction block in February. Nevertheless, it ruled out giving up its stake in the Chinese e-commerce giant Alibaba.

But investors are in a hurry. Activist investor Starboard Value launched a procedure to replace the entire board of directors of Yahoo, including CEO Melissa Mayer, last Thursday. Mayer, who joined Yahoo four years ago, has so far failed to improve Yahoo’s fortunes, which these days is measured largely by success in the stock market.

Yahoo is losing market share and has few solutions to revolutionize mobile communications; sooner or later, even the Google (four years younger) and Facebook (10 years younger) behemoths will be facing similar problems. Yahoo is 20 years old and that’s 100 in Internet years. Investors and analysts on Wall Street have been waiting for Yahoo’s big recovery but it has not arrived. In three years, the Yahoo stock rose from $15.00 to $50.00, before dropping to the mid-$30.00s of today, a far cry from its $100.00-per-share days of the late ‘90s and early 2000s.

Now Yahoo’s biggest proposition is its 15% stake in Alibaba, its one foothold on the future. Thanks to capital gain taxation regulations, Yahoo has not sold its stake in the Chinese retail giant, so it can survive around that platform, as it considers getting out of the Internet altogether.

Even if Yahoo can resolve its mobile sector gap, it would still fail to recover to its heyday. Shareholders should realize that Marissa Mayer is not the problem and replacing her won’t fix Yahoo’s malaise. Yahoo simply has no avenues to evolve. The evolution is being led by startups, which tend to finish their orbits around Google or Facebook after their initial rounds of success. (Source: “Why Yahoo faded: The Internet changed, but it didn’t,” CNET, December 9, 2015.)

Still, Yahoo has a strong reputation and a $33.0-billion market cap. Analysts believe it’s worth some $3.0 billion to $5.0 billion or even $8.0 billion. (Source: “Here’s how much Yahoo is really worth,” Business Insider, December 10, 2015.) All of those estimates are less than the company’s stake in Alibaba stake—and that’s why the time is right now for the next big step in Yahoo’s evolution.